Monday, 29 August 2011

MinMinas Outlines Sector Future

Colombia’s government is restructuring the administration of the mining sector that will include the creation of a National Minerals Agency (NMA), the end of Ingeominas. The NMA will be responsibile for supervising the sector and authorizing concessions and mining titles, replacing Ingeominas in this latter role. Colombia’s concession system – the Catastro Minero – administered by Ingeominas has proved to be untenable resulting in extensive delays in processing concession applications and uncertainty about exploration project development timescales.

Receipt of new applications was suspended for six months in March and recently extended a further six months until February 2012 to give the authorities time to clear an estimated backlog of 20,000 applications. Of 19,029 title applications pending as of February 2011, Ingeominas has resolved 3,194 and has 7,915 currently under evaluation.

The administrative changes also include the creation of a Vice Minister of Mines within the Mining and Energy Ministry that will also include an environment and communities directorate to better coordinate mining themes relating to these aspects. Ingeominas will be recast as the National Geological Service, with responsibilities reduced to being the state geological survey.

As part of the overhaul Mining and Energy Minister Carlos Rodado will advance a change of regulations to obtain more financial resources from the state and remove budgetary restrictions. The minister hopes to be able to obtain 2% of the monies received from mining royalties, currently some 200 billion pesos/year.

The minister hopes the changes will allow the growth of the mining sector. Mining has grown 3.2%/y over the last five years and the minister aims to achieve 9.5%/y growth. The minister believes that the changes will help generate royalties of US$12 billion in the next ten years. “The restructuring has taken a lot of time due to the great institutional weakness that exists,” said Rodado.

Since Law 1382 – the 2010 amendments of the 2001 Mining Code – was struck down by the Constitutional Court, the government has decided to write a new mining code, a process that will see it consult with communities, industry and the regions before taking to Congress, and take up to two years to bring into law.

Junior explorers are less than impressed by Colombia’s exploration administration, in particular the moratorium on the receipt of mining concession contract proposals that was recently extend until February 2012 to give state geological survey Ingeominas additional time to clear a backlog of requests. The moratorium was initially enacted for a six-month period on 1 February 2011 to clear a backlog of 19,629 concession requests. The extension means new contract proposals or concession contract transfers cannot be submitted until 2012. “Colombia has been put forth as the next big mining country but they need to follow through with quicker applications, legal title guarantees and improved infrastructure. Let’s hope this is what they do. The markets are hot for gold projects but not if you can't get government approvals to do work,” said the CFO of a Vancouver-based junior.

Minminas Carlos Rodado said the government has no plans to raise the royalty payable on gold production despite calls to do so amongst some senators, in order to preserve the competitiveness of the country. That was a good decision given that miners in Colombia face of the highest overall tax burdens in the continent at around 50% (34% tax on profits, 3.5% royalty, 16% IVA on purchases [reclaimable]).

Rodado said the government may seek to use other means to capture some of the additional value created by high commodity prices and so it would be advisable to take a look at what is happening in Peru where President Ollanta Humala appears to have successfully negotiated a royalty structure overhaul that allows the state can to share the benefits of higher commodity prices without killing the golden goose. Royalties will in future be based on operating profits instead of sales as is the case in Chile. Why is this good? Royalties on sales make it more difficult for new projects or expansions to be profitable but an operating profits system means both miners and the state can obtain more resources when commodity prices are high, but neither side gains when prices fall. Peru’s miners currently pay a 1-3% royalty charged on sales depending on the mineral.

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Consultant and analyst who has been generating information about the mining industry for over ten years. I moved to Colombia since 2008 to headthe investor relations effort for Continental Gold when it was a private company. I have since been working with the exploration sector in investor relations, communications and market analysis roles which brings me into regular contact with the many junior explorers operating in Colombia and the investor groups that finance them.